Pricing and Price Discrimination

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Pricing and Price Discrimination

• Scott Tower
• Lecture 4
• January 15, 2002

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Cost of Producing Information

• First copy costs
• Expensive to gather data for the first edition
  but further printing costs are virtually
  non-existent
• Information can become a commodity
• When firms offer the same data, they can only
  compete on price death spiral
• Phone book
• Britannica vs. Encarta
• Method of delivery is proving to be more
  important than the quality of data

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Cost of Producing Info. Questions

• Do you think the traditional print dictionary
  will eventually be phased out?
• What types of information providers will be able
  to survive in our new economy?

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How These Information Firms Can Succeed

• Limit pricing
• Set prices low enough to keep competitors at bay
• Cost leadership
• Dont cut corners, cut costs
• Decrease price and increase volume
• Dell
• First mover advantage
• Allow people to become familiar with interface,
  etc. so their personal switching costs increase
• Napster

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Success of Info. Firms - Questions

• Barring any legal issues, will Morpheus survive?
• Give me an example of a time when first mover has
  been a disadvantage?

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Knowing Your Customer

• The more you know, the better you can forecast
• How you can collect data
• Registration and billing
• Clickstream
• What you can do with the data
• Offer more appropriate line of products
• Price more effectively
• Dell help line

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Personalized Pricing

• Different people receive different prices
• Airlines determine your price sensitivity based
  on advance purchase and duration of travel
• Amazon.com and Victorias Secret experimented
  with charging different prices based on zip code
• Price of excess inventory can be decreases
  immediately on the Internet
• www.lastminute.com
• eBay

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Price Discrimination Comparison
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Version Pricing

• Common in offline world
• BMW has 3, 5, 7, M, Z, and X series for cars
• Similar for domain name registration
• Register.com has multiple tiers of service
  depending on what the end user wants

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Group Pricing

• Price sensitivity
• Senior citizens and students
• Lock-in
• Grab customers early and help them feel
  comfortable with your product
• WSJ is doing this with us right now
• Sharing arrangements
• Libraries pay more for journals than individuals

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Opportunities and Challenges

• Level the playing field
• The study, called "Consumer Information and Price
  Discrimination ," found that minorities pay an
  average of 2 percent more than whites when buying
  a vehicle, a figure that works out to about 500
  per sale and includes differences in the purchase
  prices as well as the costs of the new-car hunt.
• - www.newsbytes.com
• Falsifying information
• Received a subscription to Wired magazine for
  free by misrepresenting myself

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Pricing You Product - Questions

• Is there any way that firms can ensure that
  people are being honest (entering accurate
  information) online?
• How can firms defend against arbitrage?
• Do you think price discrimination is ethical?

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Questions?